Covered Call Trade Idea with Weekly Options - Generate ~$60/week from American Airlines Group (AAL) Stock

This is not a trade recommendation, this is a trade idea. I'm not a financial advisor, anything written here should be taken with a grain of salt. I take no responsibility If you will decide to invest

Here at OptionsBrew.com, we like the idea of selling options on a "good" dividend stocks, preferably from the Dow Jones, SP 500 or Fortune 500 list. In today's article, we are going to talk about a stock, which is a component of SP 500 and DJTA, and also pays a dividend. 

We found American Airlines (AAL) stock after short research on aviation stocks. In just a few fords, we like the huge implied volatility and the entry price for this stock. We see we might use it in combination with SPCE stock to generate covered call income in the future.

American Airlines Group Inc. is an American publicly traded airline holding company headquartered in Fort Worth, Texas. It was formed on December 9, 2013, in the merger of AMR Corporation, the parent company of American Airlines, and US Airways Group, the parent company of US Airways. The airline groups together form the largest airline in the world, with more than 6,700 daily flights to 350 locations in 56 countries worldwide, about $40 billion in operating revenue, over 100,000 employees, and plans to take delivery of 607 new aircraft, including 517 narrowbody aircraft and 90 widebody international aircraft.

Generate weekly income selling covered calls on AAL stock

On July 8, 2020, you could buy 100 shares of CAT stock spending $11,58 per share or $1158 and simultaneously sell out of the money July 17 expiry covered call (9 days) at the strike price of $12 for about $0.61. That gets you $61 and makes about a 5.26% return in 9 days. About 210.4% annualized. Break-even: $10.97

AAL is a dividend-paying stock, paying $0.4 per share in 2020. That's about 3.45% yield in a year. With a simple buy/write you could earn more in just 9 days and in worst-case scenario still qualify for dividend.

AAL options chain
AAL options chain

here is what could happen next:

If AAL stock closes below $12 on July 17, you keep the premium and start over.

If the stock closes above $12, your stock gets called away, but you keep premium $0.61 + realize value gain $0.42 ($12-$11.58) from selling stock higher than you bought. Total $103 or about 8.89% potential income return in 9 days.

There are several options you could use not to get shares called away, like a roll-up or roll forward. Or you could sell the stock, and start over by writing cash-secured put to take this stock back.

Remember, you are selling one contract, 100 shares of AAL stock, make sure you have 100 shares to sell if called away.

The biggest risk  - involving in covered call strategy - the stock price could fall below our buy price and stay there for months/years. 

As AAL is a dividend-paying stock, paying about $0.4per share anually (3.45% yield), you could enjoy about a 10 cents per share (befote tax) every quarter, while holding this stock.

AAL is paying dividends in following months: February, May, August, November

Together with SPCE stock, AAL might be a nice addition for income seeking covered call investors.